5 Heresies of Energy Tech Investing

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Energy investors are a pretty enterprising lot. Ever eager to catch the next big thing -- whether it's ethanol in 2007, solar in 2008, or A123's (Nasdaq: AONE) lithium-ion batteries in 2009 -- we can sometimes get carried away. Still, there are undoubtedly huge gains to be made with carefully selected investments in new energy technologies in the years ahead.

John A. Moore has 25 years of experience investing in emerging growth industries ranging from health care to specialty materials. His holding company, Acorn Energy, took the proceeds from its interest in Comverge's IPO and redeployed that capital into several early stage businesses addressing energy infrastructure challenges. John's an optimistic, yet pragmatic, thinker with some variant perceptions that I thought were worth sharing with Foolish readers. An email exchange resulted in the following interview.

Toby Shute: In a video on your website, you present "five heresies of energy technology investing." The first of your claims is that energy supplies are as infinite as the human imagination. I take it you're not a peak oil proponent?

John Moore: I agree with Matthew Simmons, author of Twilight in the Desert, that our energy sector is facing the twin cancers of rust and an aging workforce. I think the very subtle but profound point that peak oil proponents are missing is the role that innovation plays. The rise of 3-D seismic imaging, for example, has had the effect of shrinking dry holes from seven per producing well to one, which is a huge leap in efficiency, especially when you consider that the greatest expenditure of energy in the world is the extraction of energy. Other innovations like fracking and directional drilling combined with the next advance in seismic imaging -- 4D -- could have the effect of more than doubling our existing reserves. The Department of Energy calls 4D seismic data potentially the most significant technology advance for the energy industry in the last fifty years. Acorn is scouring the industry looking ways to invest in this exciting area. The history of energy is littered with prognosticators who said we were running out of energy, and for hundreds of years they've all been proved wrong.

Shute: Your view might strike some as Pollyanna-ish, but from an investment perspective, you're actually setting yourself up quite conservatively. By rejecting the scarcity theme, you're steering yourself away from businesses that require higher prices in order to make a buck. I'm a big believer in investing in low-cost producers like Ultra Petroleum, so that's a strong point in favor of your framework, even if you're dead wrong and global oil supply peaks tomorrow!

Moore: Energy is fundamentally a commodity business and incredibly cyclical. It is a tough market to survive or prosper as an investor if you are focused on the commodity side of the business. The perspective I bring is to look for distressed businesses that offer specialty, proven technologies with reference customers. These companies have ready-to-go solutions to industrywide problems. Acorn provides the capital, resources, and credibility for these portfolio companies to scale rapidly which creates industry advances and growing revenue for Acorn. For example, our clean coal company CoaLogix, created the market for regeneration of catalyst for the SCR systems in the air pollution control systems in coal-fired power plants in the U.S. Acorn is the third owner of this business. There is an installed base of over $1.2 billion in catalyst. The Clean Air Interstate Rule was imposed by the Federal government on the first of this year and that has the effect of requiring the use of the catalyst year round which means on average it has a three-year life. We believe this market for regeneration will reach over $250 million when it reaches equilibrium in three or four years. We currently have the dominant position in the U.S. regeneration market.

Shute: Your second heresy asserts that an environmental crisis is not inevitable. What can we do to avoid such a fate? Is cap and trade the right tool for the job?

Moore: By making small improvements to the existing energy infrastructure we can make lower risk, higher return bets that can improve our prosperity and our environment. According to the Department of Energy, U.S. coal-fired power plants have reduced their environmental impact (ex-carbon dioxide) by 77% over the past three decades while tripling the amount of electricity delivered from those plants. Improvements may come in fits and starts, but I don't see any reason that we can't continue to make an impact on this scale over the medium term, with or without cap and trade.

Shute: You've talked about the need for energy infrastructure that can scale and squeeze out efficiencies. What sort of technologies fit the bill? Are the real innovators in this realm going to be Silicon Valley startups, folks like IBM (NYSE: IBM), or some combination of the two?

Moore: A combination of the two. In the past, big utilities and oil and gas companies didn't buy a lot from IT suppliers or energy technology start-ups. That is about to change. The head of Boeing's (NYSE: BA) Smart Grid initiative explained to me why. He referred to the equation force = mass x acceleration. The big technology players have mass but they have no acceleration. Energy technology pioneers, big vendors and energy companies need to collaborate more closely now that there is such a clear and present danger to our infrastructure. This is one of the reasons we use the holding company structure, so that big customers can enter into contracts with our smaller divisions, knowing they have the power of a publicly listed parent standing behind them.

Shute: How do wind and solar power fit into your vision for the modernized grid? Careful -- we've got lots of fans of First Solar (Nasdaq: FSLR) here!

Moore: Even with monumental effort, wind and solar will be a very small part of the overall energy mix for the foreseeable future. This isn't a matter of belief. It's just physics and math. Pick twenty light bulbs in your house. Now unscrew nineteen of them. That's the current contribution of wind and solar today, more or less. Now, say we can double that contribution – which is a tall order. You've still got eighteen dark light bulbs in your house. So, if we put our minds to it, I think solar and wind will be more relevant in a decade than they are today. Meanwhile, insurers like Hartford Steam Boiler believe that our nation's installed transformers are at the end of their life cycle right now. We need to implement intelligent asset monitoring technologies like those from GE (NYSE: GE), ABB (NYSE: ABB), and our GridSense business so we can prevent catastrophic unplanned outages. People ultimately won't care where the electricity was supposed to come from if it isn't showing up at their house or business.

Shute: Do you expect coal-fired generation to still dominate our electricity supply in 30 years, like it does today? On a related note, one of your portfolio companies addresses emissions control at coal plants. How far has coal come in terms of its pollution profile, and is "clean coal" just nice PR for Peabody Energy (NYSE: BTU), or is it becoming a reality?

Moore: Yes. I believe we should be defining the opportunity as cleaner coal. The industry has made major strides in reducing its environmental impact. Today one-third of the capital investment in a coal-fired power plant is air pollution controls. There is a substantial opportunity to use those assets more effectively and such investments are the lowest cost, lowest risk opportunities and generate the highest return for our society and business.

Shute: I think our readers have probably run across enough commentary on oil prices lately to know that supply and demand are about the last thing driving prices today. So I'm going to jump to your fifth heresy, if you don't mind. So, John, are more efficient technologies going to help us consume less energy?

Moore: No. There's a paradox here, which is discussed in one of my favorite books, The Bottomless Well. The history of energy consumption is that we always consume more and more. Think of all the elements of what we consider human progress: computers, cell phones, MRI machines. They're all energy hogs, but they make our lives better – who's going to throw away his cell phone voluntarily? Greater efficiency has tended to lead to prosperity and greater consumption, not less. And telling ourselves this isn't so isn't going to make it not so.

Shute: Do you have any final words of energy investment wisdom for our readers?

Moore: Fish where the fish are, not where the boats are. Solar and wind may be sexy, but where is the real money being made in the near- and medium-term? There are industries that don't seem sexy to investors -- industries, for example, that worry about the infrastructure of the grid -- where the ubiquity of scale is so great that we tend to forget how huge these forces and industries are. This value is hiding in plain sight. Don't overlook it.

Shute: Thanks for sharing your thoughts with us today.